RBA Rates Decision – November 2011

Finally the planets have aligned and we have our long awaited cash rate cut of 0.25% bringing the cash rate down to 4.50%. I would think all the banks/lenders will be sensible in passing on this full amount without incident, CBA and Westpac have already done that and now I’d expect the others to follow. However history tells me they will set a date some weeks into this month for the rate cut to be effective from, as opposed to when rates go up they immediately passing on the interest rate increase. This sneaky delay in passing on the rate cut should make them all a few million in extra profit to cover their Christmas bonuses, says the cynic in me.

The first planet to align was the ‘inflation planet’, as there was no doubt that the better than expected inflation data released in October was the main driver for the RBA to drop rates, along with the slightly subdued outlook for 2012 from Treasury. Then the Euro Economic zone’s planet fell into place as they announced a debt restructuring agreement last week that no doubt helped push our central bank to provide households who have a mortgage with an early Christmas present.

The RBA can feel relatively comfortable in how they and the government have gone about their jobs in keeping us in positive economic growth during the past few turbulent years, as other developed nations still need to have their resuscitation kits close by as they struggle in getting those green shoots of the past year anywhere near surviving. It’s still a real mixed bag across the world and if I was a betting man I’d bet on more troubles ahead, as the policy supporting the Euro zone announcement shows the devil in the detail. Even last night’s decision for Greece to call a referendum to vote on their decision to accept the package is another example that this whole debt problem is going to take years to fix. There is no silver bullet solution for the enormous debt issues with politicians in each country using it as a means to struggle over gaining access to power in their own countries. And even though increased trouble in world markets would result in further decreases in mortgage rates, nobody needs or wants a global economy that stalls; as it will impact on our little economy Down under and jobs will be lost.

So looking forward the RBA now finds itself in a real ‘sweet spot’, with this rate drop, as it gives them some further leverage in either direction if required. My message to those who are going to get an extra $50 – $200 a month in disposable household income; if you spend it quickly on consumables, then this rate cut might be short lived, so either pay down some debt for the uncertainty around the corner, or given that currently you have been managing well to date, this surplus cash might secure you your first investment property or allow you to add another one to the portfolio. Because one thing for sure is when affordability starts to bring the first home buyers back into the market, well the only way for popular property is up in value then demand outstrips supply and people get impatient to get into the market.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)